What it is:
Restricted stock isthat the owner cannot sell immediately or under certain conditions.
How it works (Example):
People usually come to own restricted stock through an IPO or a . For example, let's assume that Company XYZ goes public. To reward certain key employees for their contributions to the company over the years it took to become successful, the board of directors gives them each 1,000 of restricted stock. These cannot be sold for 90 days after the IPO date. On day 90, the shareholder usually owe on the value of the shares if he or she received them as part of a grant. When the shareholder sells his shares, he also pay capital gains tax on the .
Why it Matters:
The general motivation behind issuing restricted stock is usually to avoid having a large number of sellers in the paper millionaires in our example tried to out at the same time, their rush to sell the would have the ironic effect of reducing the value of their . Accordingly, restricted carries more risk than unrestricted because the value of the may decrease before the owner is able to sell it. Restricted also can encourage key employees to remain with the company longer.at the same time, which would reduce the value of the . For example, if all of those